DFS issues second profit warning in three months - but is the worst over?

DFS has issued its second profit warning in just a matter of months, blaming the Red Sea crisis for significantly increasing the sofa company’s costs.

The FTSE all-share retailer, which owns more than 100 shops across the UK, said sales are now expected to be between £995m to £1bn in the 12 months to June 30, with annual underlying pre-tax profits dropping to between £10m and £12m.

During the previous 12 months DFS reported underlying pre-tax profits of around £30m. 

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In a statement the company said that since its last update in March “consumer demand in the upholstery sector has remained challenging and Red Sea routing issues have persisted, resulting in delays to customer deliveries and higher freight costs”.

The company’s share price has fallen 20% since its 12-month high in July last year.

Attacks by Houthi militants in Yemen on commercial shipping vessels travelling through the Red Sea have caused significant problems. The attacks, which began in November, have prevented many of the world’s biggest shipping firms from taking freight through the Suez Canal trade route, instead having to redirect around the tip of South Africa. This diversion can add many days to a journey and significantly increases fuel costs.

DFS said the shipping problems have delayed £12m to £14m-worth of deliveries, resulting in these now being pushed into the next financial year.

Threat of another profit warning

The company said that there is an “additional profit risk of up to £4m if the Red Sea shipping delays continued through to our year end date”.

DFS had already slashed guidance in March, saying it expected annual revenues to fall to between £1bn and £1.02bn and underlying pre-tax profits to drop to between £20m and £25m.

The consequences for global shipping have been profound. According to data from the International Monetary Fund (IMF), on 27 December there were around 5.53 million metric tonnes of trade passing through the Red Sea. On 16 January there were only 2.08 million – a decline of 62%.

When the ship Ever Given got stuck in the Suez Canal in March 2021, the volume of shipping through the Red Sea fell by 53%, which indicates that the situation created by the Houthi blockade is significantly worse for global shipping.

DFS also pointed to slowing consumer demand to explain its problems, as sales in the upholstery sector had fallen 10% annually.

It said: “While the economic outlook remains hard to predict we expect the widely predicted lower inflation and interest rate environment to have a positive impact on upholstery market demand levels with the declines experienced across the last three years starting to reverse and the market slowly recovering in our FY25 period.”

Some bright spots

Despite this, the company said it had been encouraged by an improving trend in its order intake, “which is up over 9% in our fourth quarter to date”.

It said: “The recent improvement comes as we annualise weaker prior year comparatives and also following successful initiatives to strengthen the product ranging and pricing in Sofology and reintroducing four-year interest-free credit at select times to maximise revenue and profit in this difficult trading environment.”